ACA net investment income tax

The ACA (Affordable Care Act) 3.8% surtax on Net Investment Income (NII) is imposed on threshold income amounts that are dependent upon filing status and the make-up of a taxpayers' income.[note 1] For individual taxpayers, the surtax will be levied on whichever of the following is less— modified adjusted gross income above the threshold, or net investment income. These income categories break down as follows:

Modified adjusted gross income consists of

Net investment income consists of

Adjusted gross income (AGI)
+ Foreign earned income exclusion

Interest
+ Dividends
+ Capital gains
+ Rent and royalty income
+ Nonqualified annuities
+ Income from businesses that are passive activities to the taxpayer
– Expenses directly allocated to the production of these income sources

Note that interest from tax-exempt municipal bonds is not included in net investment income.[note 2]

Contents

Tables

The tables below show the levels of investment income/ adjusted gross income that can be recognized by individual taxpayers without triggering the surtax for given levels of investment income or other earnings. The threshold amounts reflect the tax filing differences ($250,000 for married filing jointly/ surviving spouse with dependents; $200,000 for single/head of household; and $125,000 for married filing separately). The threshold amounts are not indexed to inflation.

Keep in mind that gross income [1] and adjusted gross income [2]are not always equivalent. Some common ways taxpayer's reduce gross income include:

Trusts and estates should distribute income to beneficiaries rather than retain the income in the trust or estate and incur the ACA surtax at the low trust and estate threshold ($12,300 for 2016 and $12,500 for 2017).[3][5][6]

This much non-investment income can be recognized without triggering the 3.8% surtax

Net Investment Income

$250,000 Threshold

$200,000 Threshold

$125,000 Threshold

$50,000

$200,000

$150,000

$75,000

$75,000

$175,000

$125,000

$50,000

$100,000

$150,000

$100,000

$25,000

$125,000

$125,000

$75,000

$150,000

$100,000

$50,000

$175,000

$75,000

$25,000

$200,000

$50,000

$225,000

$25,000

This much Net Investment Income can be recognized without triggering the 3.8% surtax

Non-investment income

$250,000 Threshold

$200,000 Threshold

$125,000 Threshold

$50,000

$200,000

$150,000

$75,000

$75,000

$175,000

$125,000

$50,000

$100,000

$150,000

$100,000

$25,000

$125,000

$125,000

$75,000

$150,000

$100,000

$50,000

$175,000

$75,000

$25,000

$200,000

$50,000

$225,000

$25,000

Notes

↑The NIIT applies at a rate of 3.8 percent to certain net investment income of individuals, estates and trusts that have income above the statutory threshold amounts. Estates and Trusts will be subject to the Net Investment Income Tax if they have undistributed Net Investment Income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year (this threshold amount is $12,300 for 2016 and $12,500 for 2017). See: Net Investment Income Tax FAQs